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When UK Chancellor of the Exchequer Alistair Darling declared a bold rescue plan for the UK banking sector on Wednesday October 8, he created a blueprint for a bailout that has been copied by governments around the world. But last Monday, when he revealed the detailed terms and conditions of the plan, he got a frostier reception.

The Government had – on the recommendation of its advisers – substantially tightened up the terms of the rescue plan, in a move that underlines how, in the words of European Central Bank governor Jean-Claude Trichet, governments and their advisers are writing the rulebooks for dealing with this crisis as they go along.

Bankers and investors have compared details of the UK bailout unfavourably with the initial concept and with similar plans in the US and Switzerland. They argued last week that the British plan, having led the world, is now too onerous and could be self-defeating.

UK banks, for example, will have to pay twice the interest on the Government’s preference shares than their counterparts in the US, who have no restriction on paying dividends and no penal rates to guarantee interbank lending.

One banker close to the situation said last week: “The irony is that whereas the US Government had the wrong plan, but has now got the implementation right, the UK had the best plan, but is getting the implementation wrong.”

One of the challenges for the Government has been juggling the advice from different advisers at different stages of the process, in the context of a volatile market and fragile confidence. The concept was sketched by a small team of bankers at Standard Chartered and UBS, before being fleshed out with the help of JP Morgan Cazenove ahead of the announcement.

The detailed terms and conditions were then added and changed by Credit Suisse and to a lesser extent Deutsche Bank in time for its implementation five days later.

The negotiations started on October 2 at the London headquarters of Standard Chartered in a meeting convened by Shriti Vadera, a close adviser to Prime Minister Gordon Brown and a former investment banker at UBS.

Present were Standard Chartered’s chief executive Peter Sands and finance director Richard Meddings and three investment bankers: Robin Budenberg, a London-based managing director at UBS responsible for the bank’s work with the Government, David Soanes, European head of UBS’ capital market business, and Michael Klein, the former chief executive of Citigroup’s investment bank who has since become a roving top-level adviser to governments and banks.

Over five hours, the small group hammered out the basis of a rescue plan for the UK banking system, which would solve the problems of liquidity and lack of capital that had been plaguing some of the country’s largest banks.

One source close to this small group said: “Banking is essentially a confidence trick and the UK banking system was losing confidence. What we needed was a plan that gave the market confidence in our system.”

The catalyst for evaporating confidence in UK banks had been the Irish Government’s decision a day earlier on October 1 to guarantee the country’s entire banking system. This had serious implications for UK banks, which had no such guarantee and the pressure on other European governments to follow suit was immense.

However, the Irish guarantee equated to about $130,000 (€96,000) for every man, women and child in the country, leading traders, who had witnessed the collapse of the Icelandic market following a similar guarantee, to joke: “What’s the difference between Ireland and Iceland? Six months and one letter.”

One source said: “Our view was that the Irish Government was very badly advised and that the guarantee was effectively meaningless, but we couldn’t ignore the great sucking sound of deposits flowing out of the UK and into Ireland.

“We saw that if we didn’t come up with something different we’d have been forced to do something similar.”

Other European governments were beginning to crack and Chancellor Angela Merkel implied Germany was considering a similar measure.

A draft of the bailout plan was presented to Government officials including Brown and Chancellor Alistair Darling.

The plan was updated throughout the weekend of October 4 and 5 and JP Morgan Cazenove’s chairman David Mayhew and chief executive Naguib Kheraj were brought in to advise on the final drafting.

On Monday, October 6, it seemed the UK Government might take the same route as the Irish, with Darling giving a statement to Parliament in which he mentioned an increase in the compensation limit on deposits from £35,000 (€45,000) to £50,000, but with no mention of the scheme being prepared that would be announced two days later.

At a meeting that evening with chief executives and chief financial officers of all the largest UK banks, Darling gave no details of the plan. Only Meddings of Standard Chartered knew what was being prepared.

The next day, the pressure for a comprehensive UK bailout was reaching boiling point. Shares in Royal Bank of Scotland lost nearly 40% of their value, while those in HBOS fell 42% and Barclays, which had appeared relatively unscathed, dropped 9%.

According to one source, a large US bank had said it would no longer deal with RBS as a going concern. Another banking source said: “No one was lending to them and to us it looked like full nationalisation was the only solution.”

A source close to the Government’s discussions said: “We knew we had to come out with a statement the next day, otherwise we might have lost control of the situation.”

At a reconvened meeting of UK bank chief executives on October 7, Darling laid out the details of the rescue plan to be announced the next day, whereby the Government would give them access to a £50bn recapitalisation package in return for selling preference shares or ordinary shares, the provision of £250bn of Government wrapping for medium-term interbank borrowing and an extension of the special liquidity scheme.

The next morning the measures were hailed by the market as the full bailout the industry needed. However, it was at this point that opinions differed on how the plan should be implemented.

One problem was that JP Morgan and UBS were unable to work on the implementation phase of the bailout due to conflicts of interest, as they are corporate brokers and financial advisers to a range of UK banks. Hence Credit Suisse and Deutsche Bank were brought in.

On October 9 Credit Suisse was given primary responsibility for implementing the plan. Two days later, the Government added a team led by Anshu Jain at Deutsche Bank to advise it, mainly for its expertise in derivatives but also in case Barclays decided it needed an injection of Government money, which would have posed a conflict for its broker Credit Suisse.

Whereas the original advisers had insisted that Government-supported lending must be as cheap as possible, the Credit Suisse team, led by the chief executive of its UK and Irish businesses James Leigh-Pemberton, and head of financial institutions Ewen Stevenson, pushed to maximise the return for the UK Government and was in favour of more onerous terms.

It backed extracting a high price from financial institutions asking for a Government wrap on short-term to medium-term interbank borrowings, supported a dividend block on banks accepting Government capital injections and said banks should be charged a high coupon on the preference shares sold.

Darling’s announcement detailing the part-nationalisations of RBS and a combined Lloyds TSB-HBOS contained these revisions. One source close to the talks said: “It all goes against the entire idea behind the bailout. The point was to make borrowing as cheap as possible so banks would use the facility on offer, but these terms make it unattractive.”

In draft documents the idea was to charge banks a couple of basis points over the recent average cost of their default insurance to secure a Government guarantee on lending to other banks. However, in the final document this had risen to 50 basis points.

One trader said: “No bank would want to borrow at these rates. Most will simply opt to run down their lending book instead of making new loans on a zero percent margin.”

Hope remains that the UK Government is waking up to criticisms of its plan and it is reviewing the block on dividend payments. However, bankers have warned that, without revision, early promise could turn to disappointment.